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Macroeconomic and sectorspecific parameters1

Global economic momentum increased slightly during the past financial year. Following two years of economic crisis, recovery remained modest with several setbacks during the course of the year. More sustainable economic growth was hampered in particular by problems related to government debt. At 2.4 per cent, projected global economic output for 2014 is just marginally above the 2.3 per cent generated last year. Economic performance varied greatly in the developed world and emerging countries: while recovery was observable in the United States and the eurozone, economic momentum slowed considerably in many emerging countries. A key trigger for this was the US Federal Reserve Board’s decision to gradually wind down its expansionary monetary policy in autumn of 2013, causing investors to withdraw funds from emerging countries. In addition, specific national problems resulted in slower economic growth in the respective countries.

At the same time, many political crises and conflicts intensified during the year, particularly in the Middle East. In Europe, the Ukraine conflict cast a long shadow over the political agenda. It led to significant economic problems in Ukraine and continued to negatively impact the already sluggish economic performance of Russia as well. The Russian economy was weakened as a whole by declining investor confidence and the sanctions imposed by the European Union and the United States.

The currencies of many emerging economies weakened substantially as investors withdrew funds and current account deficits climbed to high levels in some cases. The Ukrainian hryvnia lost more than half its value, while the currencies of Russia, Turkey and India declined over 10 per cent in value over the course of financial year 2013/14.

The falling value of these currencies resulted in an above-average increase in consumer prices, in particular in Russia, Turkey and India. By the end of the financial year, the increase in consumer prices in these countries was in the high single-digit range. By contrast, inflation in most European countries was below average in light of the ongoing muted economic growth overall. Consumer prices actually decreased in several countries. This was especially true of food prices: following record-breaking increases in the eurozone in 2012 and 2013, a decline of 1 per cent and thus a deflationary trend was registered at the end of the reporting year.

In terms of the regions in which METRO GROUP is active, growth in Germany continued to outpace that in other Western European countries. While most Western European countries were able to pull themselves out of the recession during the reporting period, high levels of government debt and the rocky path to consolidation continue to hinder dynamic growth. At the same time, recovery was very uneven.

Central European countries benefited from the slight recovery thanks to their economic ties to Western Europe and experienced somewhat stronger growth than in 2013. In contrast, the economic situation in the emerging countries of Eastern Europe was considerably more difficult, due in part to political crises. Economic momentum lagged behind the previous year’s level particularly in Russia and Ukraine, but also in Turkey. The projected growth rate of just under 1 per cent for Central and Eastern Europe as a whole is therefore below the previous year’s level yet again.

The highest growth rates were once again seen in the emerging countries of Asia. However, investors’ withdrawal from these countries hurt economic growth there as well. Projected economic growth for this region as a whole in 2014 is just under 4 per cent, slightly below the previous year’s level.

1 The numbers indicating the development of gross domestic product in the chapter Macroeconomic and sector-specific parameters represent the entire years of 2013 and 2014. As such, the figures for 2014 represent projections. Unless otherwise indicated, the qualitative statements in the text refer to the reporting period.

Development of gross domestic product in key global regions and GermanyPercentage change year-on-year

Previous year’s figures may deviate from the Annual Report 2013 if final figures were not yet available at the reporting date

2

Forecast

World

2.3

2.4

Germany

0.1

1.3

Western Europe (excl. Germany)

−0.2

1.0

Eastern Europe

1.2

0.8

Asia

4.0

3.8

Below-average growth continues in consumer goods retailing

The impact of economic developments on retailing in the regions where METRO GROUP does business was varied. After two years of declining sales, the retail industry made a gradual recovery in Western Europe with a slight nominal plus of nearly 0.5 per cent in the past financial year. On a price-adjusted basis, sales were slightly higher as a result of declining retail prices on the whole. Nominal growth rates in the retail industry were indeed higher in Eastern Europe and Asia, with Asia once again posting the strongest growth. However, growth in both regions lagged behind the rates seen in the same period of the previous year. At the same time, sales were driven much more strongly by prices.

Germany

The German economy continued to outperform other Western European countries in the reporting period. After a dynamic first half of the year, the second half was marked by a slowdown. Overall, the economy is expected to grow 1.3 per cent in 2014 (previous year: +0.1 per cent). Unemployment continued to decline in comparison to the same period of the previous year, and disposable income generated solid growth. Real consumer purchasing power increased as a result of low inflation. This had a correspondingly positive impact on consumption and retailing. The retail industry generated nominal growth of nearly 2 per cent (real: approximately 1 per cent) in the reporting period and thus expanded at a somewhat faster pace than in the previous year. In addition, sales growth in food was still somewhat higher than growth in non-food.

Western Europe

Economic growth in Western Europe remained modest despite the gradual recovery. Following a downward trend in the previous year, gross domestic product is expected to increase by approximately 1 per cent in 2014. The unemployment rate only slowly declined in the reporting period from the record level reached in autumn 2013. Despite some exceptions, crisis-hit countries and more robust core markets continued to develop at different paces. Aside from Germany, the economy grew at an above-average rate, particularly in Sweden and Switzerland. In addition, the former crisis country of Spain performed very well, with an expected real increase in its gross domestic product of 1.5 per cent in 2014. In comparison, Italy’s economy is expected to continue shrinking slightly, and France’s economy barely generated any growth at all in 2014 as a result of structural problems.

As a result of slightly improved conditions, the retail industry in Western Europe generated a nominal gain of just under 0.5 per cent in the reporting period (2012/13: –1.0 per cent) in the reporting year. In most countries, the different economic development trends were also mirrored in the retail industry. In addition to Germany, the retail sector performed especially well in Austria and Sweden. The economic upswing made itself felt in Spain with a slight upturn in retail sales following several years of decline. By contrast, retail sales declined in France and Portugal, among other countries.

Eastern Europe

On the one hand, Eastern European countries benefited from the gradual recovery due to their economic ties to Western Europe. On the other, political and economic conditions deteriorated, in particular in Russia and Ukraine as a result of their political conflict. The Turkish economy also cooled noticeably in 2014. Overall, growth in Eastern Europe continues to fall short of its economic potential. Projected economic growth of just under 1 per cent for 2014 is once again just below the previous year’s level (1.2 per cent). Poland and Hungary are performing exceptionally well, however, with expected growth rates of 3 per cent each. By contrast, economic performance is declining in Russia and Ukraine as well as – prospectively – in Croatia and Serbia and once again Greece. As a result, retail performance was particularly weak in Greece and Croatia. Russia and Turkey continued to record high nominal retail growth despite the economic downturn. However, increases in prices were also above average, meaning that growth was substantially lower in real terms. Furthermore, the weakening of both countries’ currencies against the euro reached double-digit figures in percentage terms. By contrast, retail sales developed positively in Hungary and Romania, even on a price-adjusted basis.

Asia/Africa

The emerging economies of Asia were once again the source of the greatest growth in the past financial year. The projected growth rate of just under 4 per cent for Asia is only slightly below the previous year’s level. However, the emerging economies of Asia had to contend with weaker economic momentum. In China, another government stimulus programme shored up the economy and enabled growth to remain above 7 per cent. Solid growth of 1 per cent is forecast for Japan in 2014. A special development affecting consumption occurred in April when the value added tax was increased 3 percentage points from 5 per cent to 8 per cent. Prior to the increase, consumption and retail sales rose at an above-average rate and then decreased again afterwards. Over the course of the entire financial year, retail trade experienced above-average growth at a nominal rate of approximately 2 per cent.

Retail growth remained high in the emerging countries of Asia. In China, the retail business again grew by more than 10 per cent nominally during the past financial year. Other emerging economies in Asia also produced growth that nearly reached double-digit levels. But inflation hit high single-digit levels particularly in India and Pakistan, meaning that real sales were significantly lower.

Development of gross domestic product in METRO GROUP countriesPercentage change year-on-year